Collateral Manager Eyes REITs To Back New CDO

Cohen Bros. Financial Management, a collateral manager for trust preferred collateralized debt obligations, is planning to use real estate-related paper to back CDOs, in what could potentially signal a new underlying asset for the market. Daniel Cohen, chairman and ceo in Philadelphia, says the firm is planning to branch out and use real estate investment trust securities to provide the cash flows on CDO liabilities it plans to issue at some point next year. Commercial mortgage-backed securities are widely used as underlying assets in CDOs and have been one of the most popular asset classes this year (BW, 4/7), but Cohen says this would be the first time REIT paper has been used to generate cash-flow for the liabilities. He says Merrill Lynch would most likely lead such a deal, given that the is working with Cohen on its current offering, ALESCO I. Merrill's CDO structuring team is the "most dynamic and creative" on Wall Street, Cohen says. Chris Ricciardi, head of the team, declined to comment.

The strategy comes as the collateral manager, a buy-side arm of Philadelphia-based broker/dealer Cohen Bros. & Co., has recently separated itself from Trapeza Capital Management, a joint venture Cohen was involved in that has itself issued three CDOs of bank trust preferreds. Cohen Bros., which specializes in financing for mid-sized institutions, had been a cog in Trapeza along with publicly traded Resource America and Financial Stocks, a small investment advisor. Cohen describes the split as an amicable one and notes there's a fair amount of "brotherly love" involved (his brother is the chief operating officer at Resource America).

Cohen says Cohen Bros.' desire to expand its CDO product range past bank trust preferreds to CDOs of insurance trust preferreds and, eventually, real estate assets, led to the breakup. "They wanted to only specialize in banks and we felt we could do REIT paper or private real estate company" assets. Cohen Bros. priced its first insurance trust preferred, Dekania CDO Ltd., last month.